Pebblebrook Hotel

Greetings and welcome to Pebble Brook Hotel Trust Third Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. You may begin.

Thank you, Donna, and good morning, everyone. Welcome to our third quarter 2026 earnings call. Joining me today are Jon Bortz, our Chairman and Chief Executive Officer, and Tom Fisher, our Co-President and Chief Investment Officer. Before we begin, I'd like to remind everyone today that our remarks are as of October 30th, 2026, and today's comments may include forward-looking statements that are subject to risk and uncertainties. Please refer to our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of any non-GAAP financial measures mentioned today. Now let's get into the quarter. We're pleased to report that for the third consecutive quarter, our results far exceeded the high end of our outlook across every major earnings and operating measure. Same property hotel EBITDA increased 15.1% to 115.2 million, 10.7 million above the high end. Adjusted EBITDA was 107.9 million 11.4 million above the high end, and adjusted FFL per diluted share was 63 cents, or 11 cents above the top end of our outlook. Beyond the headline beat, the strength was broad-based across the portfolio. ADR increases drove the bulk of our room revenue growth and resource generated strong out-of-room spending, and our hotel operating teams converted a substantial portion of those revenue gains into profits. Stain property rep art grew a robust 8.3% driven by a strong 7% increase in ADR and suddenly more than 1% growth in occupied room nights. This is an important shift from earlier in the recovery when filling rooms did most of the work. We're achieving higher rates while still growing occupancy and our business and leisure customers continue to spend while on property. Significantly higher transient revenue drove much of this quarter's improvement. Transient ADR increased 8.5%, producing a very strong 9.1% growth in transient room revenues. Corporate transient ADR increased 9.4%. Room nights also increased significantly in our higher-priced consortia channel, while certain discount channels declined. Overall, that means we had a stronger customer mix, not just higher prices in the same business. Group room nights also grew over 3%, while group ADR increased 1.2%. The monthly trend was encouraging as well. Same property REPAR grew 10.1% in July and 5.3% in August before rebounding to 9.4% in September. Importantly, the strength continued beyond the early summer events. Based on our estimates, one-time events accounted for only about 40 basis points of Q3 REPAR growth. Now let me break down the portfolio performance, starting with the resorts. Resort REPAR increased 8.4%, while total rep hour at our resorts grew 9.2%. Food and beverage revenue climbed 11.2%, reflecting very strong outlet, banquet, and catering demand. Eight of our 13 resorts generated hotel EBITDA growth of 20% or more. And our resort EBITDA margins expanded 250 basis points to 32.6%. Altogether, our resorts contributed 8.2 million of the 15.2 million increase in same property hotel EBITDA. These results demonstrate the continuing payoff from our strategic redevelopment investments. Newport Harbor Island is a terrific example of this. RepR increased more than 14% in Q3, driven by an ADR increase of almost 20%. Total RepR grew even faster, and Hotel EBITDA increased by more than 2 million, or 19%. We didn't transform Newport simply to sell more room nights. We set out to create a higher quality resort, that attracts guests willing to pay more and spend more throughout the resort. That strategy is working at Newport, and we're seeing similar success elsewhere in the portfolio. Robert's Del Mar, Paradise Point Resort and Spa, and Estancia La Jolla also delivered significant improvements in profitability this quarter. Turning to our urban markets, Rumpart grew 8.3%, generating almost $7 million of incremental hotel EBITDA versus last year. The largest positive contributors came from San Francisco, Boston, and Los Angeles, together adding $8.5 million of Hotel EBITDA compared with the last year. Those gains were probably offset by weaker results in downtown San Diego, which I'll come back to shortly. San Francisco's strong recovery gained further momentum. Repar increased 14.5% in Q3, and Hotel EBITDA improved $3 million. At one Hotel San Francisco alone, Repart rose 21%, adding more than 1 million of EBITDA. Based on our current full year forecast, our San Francisco Hotel EBITDA is on pace to grow a massive 65% in 2026, following a 59% increase last year. Even with that growth, year-end EBITDA will remain roughly 25 million below its pre-pandemic level, leaving substantial room for further recovery. Boston was another major contributor, adding 2.7 million of incremental hotel EBITDA, supported by 10.6% Repar growth. All five of our Boston hotels improved Repar, despite a softer convention calendar. The Liberty, W Boston, and Westin Copley each posted double-digit Repar gains, showing the strength with broad base. Los Angeles Repar increased 10.7%, and hotel EBITDA climbed 2.8 million, or 60%. Our full year forecast still leaves our LA hotel EBITDA more than 23 million below its prior peak. But with a favorable lineup of major events in 2027 and 2028, we see a meaningful runway in LA for continued earnings recovery. San Diego had two very different stories. Our four resorts were exceptional, with rep are increasing 14% and hotel EBITDA growing 4.5 million. Downtown San Diego was a different story. rent part declined 4.5% and hotel EBITDA fell 1.6 million. The soft convention calendar, especially in September, was the primary headwind for downtown, not a broader market concern. With a much stronger citywide calendar expected in 2027, we anticipate a significant rebound in downtown San Diego. To put that opportunity in perspective on a comparable basis, Our resorts generated $16.8 million more hotel EBITDA in this year's third quarter than in Q3 2019. Our urban hotels, meanwhile, were still $21.8 million below their 2019 third quarter level. That contrast captures our investment thesis rather well. We've created substantial resort value in large part through our redevelopment projects, and there remains meaningful earnings recovery potential across our very well-positioned urban portfolio. Across the portfolio, strong revenue growth translated into an even stronger profitability result. Our teams converted 58% of the $26 million increase in same property total revenues into 15.2 million of incremental hotel EBITDA. Total expenses increased just 4% compared with almost 7% revenue growth, and hotel EBITDA margins expanded 205 basis points to 28.8%. That reflects tremendous disciplined execution by our operating teams and asset managers. We also benefited from lower fixed costs, which are worth separating from day-to-day operating productivity. Property taxes declined by approximately $1 million, reflecting a property tax credit and lower property taxes in San Diego. Property insurance costs were $1.6 million lower, and a lower property insurance premium run rate should also benefit in 2027. We also have a large number of property tax appeals outstanding which we expect will generate additional savings, although the timing and magnitude are difficult to predict. Those fixed cost savings help drive this quarter's 58% flow through, but we wouldn't expect that run rate every quarter. The more important point is that our underlying operating efficiencies are consistently improving results. And year to date, results have reinforced that point. Through September, same property revenues increased 7.1%, Hotel EBITDA rose 14.7% and margins expanded almost 190 basis points. We have increased margins each of the first three quarters. At the corporate level, adjusted EBITDA increased 8.7% in Q3 and adjusted FFO grew 18.9%. Adjusted FFO per diluted share increased 23.5%, benefiting from both stronger earnings and a reduced share count. Our free cash flow increased more than 24% to $55.6 million in Q3 and even more on a per share basis. Through September, free cash flow reached $143 million, 45% above last year, and that's after capital investments and common dividends. That growing cash generation gives us more flexibility to strengthen our balance sheet and allocate capital opportunistically. We invested $14.8 million in the quarter during Q3, and lowered our full-year capital investment outlook by $5 million to a range of $60 to $70 million. The reduction primarily reflects timing. And we also continued to refine the portfolio through selective property sales. Earlier this month, after quarter end, we completed the sale of the Hotel Zags in Portland for $10 million. The hotel generated $600,000 of negative EBITDA over the preceding 12 months, so the sale improves our ongoing earnings profile while also generating cash for re-appointment. We also recorded 77.3 million of non-cash impairment charges related to the sale of Hotel Zags and updated valuations for several other properties. These adjustments reflect our ongoing review of potential dispositions as we work to optimize the portfolio and create value for shareholders. Over the past year, we've sold nearly 170 million of hotels at an aggregate 17.4 times trailing EBITDA multiple and a 3.9% NOI cap rate. These transactions provide meaningful pre-market valuation benchmarks, and each hotel was sold within our NAV ranges at the time. We also increased our estimated NAV by $1 per share from last quarter to a range of $23.50 to $27.50 per share. The updated NAV reflects improved operating performance of our properties, the current transaction market, and the benefit of our common and preferred share of 5X. Speaking of buybacks, during Q3, we repurchased approximately $1.2 million of common shares at an attractive price of $18.12 per share and deployed $7.2 million to retire preferred shares at an average 23% discount for liquidation preference. Our goal is to grow value per share, not simply to buy back securities. And our balance sheet continues to strengthen. Net debt, the trailing 12-month corporate EBITDA fell to 5.1 times from 5.9 times at year end. We finished September with $298 million of cash and restricted cash, $641 million of revolver availability, and another $90 million of undrawn term loan capacity. The remaining $350 million of convertible notes due in December are fully funded by existing resources and expected cash flow. After that, we have no other debt maturities until 2028. So stepping back, Q3 demonstrated how our strategies reinforce and build on each other. Our previous major strategic redevelopment investments are helping to drive pricing increases and higher on-property spending. Our operating initiatives are converting more of that revenue into profit, while lower capital requirements are lifting free cash flow. And with a meaningful urban recovery still ahead, we see a compelling path to even stronger FFO and free cash flow growth. And with that, I'll turn it back over to Jon to discuss the industry backdrop, our updated outlook for 2026, and the opportunities ahead in 2027. Jon. Thanks, Ray.

Since Ray covered our third quarter performance in detail, I want to step back and talk about what we're seeing across the industry, why the strength is building, and what that could mean for Pebble Brook in 2027 and beyond. As a reminder, the industry setup was very favorable for Q3. A better holiday calendar, an active major events calendar, and the ongoing reconnection between GDP growth and industry demand growth, they all delivered again in the third quarter, just as they did in the second. Going into the third quarter, our concerns continue to revolve around the potential for geopolitical or policy events that could negatively impact the economy and travel. Fortunately, the conflict in the Middle East and constantly changing trade policies don't seem to have negatively impacted the economy or US travel so far this year. As a result, industry demand growth improved sequentially in the quarter as the economy accelerated, seemingly unaffected by global and geopolitical uncertainty. With little new supply being added, occupancies also rose sequentially. We experienced more compression days, There was less price sensitivity by higher end customers in particular. Pricing confidence improved and led to better segmentation, less discounting, and fewer promotions. As a result, ADR growth accelerated in the summer with the industry averaging 4.3% while we achieved 7% from July through September. We were pleasantly surprised and encouraged by this recent acceleration in demand and pricing. All of the major hotel demand segments were humming throughout the quarter. Group, corporate transient, and leisure travel all grew weekdays and weekends alike. Only international inbound failed to improve. From Pebble Brook, we saw the same benefits as the industry did in Q3 and more. Despite softer convention calendars, and several of our major markets. During the third quarter, in the quarter, for the quarter pickup was very strong, exceeding last year by $10.5 million. This is an acceleration from Q2. And in the year, for the year pickup in Q3, increased by $15.3 million over last year's pickup, leading to the large increase in our Red Park outlook for 2026. Also on the positive side, we haven't seen any increasing group cancellations or attrition, and attendance levels for group meetings have been more predictable than last year. We continue to watch for signs of weakening, but pickup remains favorable across the month, quarter, full year, and into 2027. Looking at the economy, business investment and corporate profitability growth are very strong and remain extremely supportive of travel. The consumer, and particularly the higher-end consumer, continues to be employed, is in very good financial condition, is benefiting from substantial increases in wealth, and continues to prioritize experiences, including travel. Pebble Brook's concentration in upper upscale and luxury hotels positions us very favorably as this affluent traveler continues to spend. Given these very positive and visible factors driving demand growth and with little new supply throughout the industry, there are fundamental reasons to be encouraged about this year's positive industry trends continuing through the rest of this year and next year. Of course, there are risks We remain concerned about potential negative impacts from the protracted and widening Middle East conflict, policy changes and geopolitical instability, the potential impact of rising interest rates, and the possibility of another government shutdown following the elections. But, given the strong operating performance in Q3, and with October continuing that trend, We've increased our U.S. industry rev part growth outlook by 175 basis points at the midpoint to a range of 5.5 to 6%. As we look beyond this year, we continue to believe we're at the beginning of a very strong multi-year up cycle for the hotel industry. I think we can now confidently forecast that the new supply pipeline is significantly constrained and should remain so through the rest of this decade. Demand growth is supported by the major multi-year capital investment cycle related to both AI and reshoring of manufacturing that has just begun. And we expect the creation and build out of the robotics industry will provide an increasingly significant lift to business investment over the next decade. which supports demand growth even further into the future. We also expect large and growing benefits from the massive wealth that has been created over the last 15 years for both investors and employees and from the largest transfer of wealth in global history as the baby boomers begin to pass on the wealth they've amassed. We believe the prospects for healthy multi-year demand growth have never been stronger or clearer in the last 30 years, nor has supply growth been so limited at the same time. These are incredibly positive multi-year fundamentals. The median term setup is very good, just like this year's setup was very good. Of course, a lot of things could still go wrong, as they did last year. Before turning to Q4, let me explain why we're increasingly constructive about 2027, even with this year's strong results and comparisons. While some industry rev-par forecasts for next year are constrained due to concerns about difficult comparisons to this year, our more constructive view rests on powerful fundamentals and cyclical trends and their benefits, including demand growth continuing to outpace very little new supply which creates an improving overall pricing environment. As I just mentioned, we expect the economy to remain strong and potentially accelerate as business capital investments ramp further next year and corporate profit growth remains above historical levels. We believe the wealth effect will increasingly boost spending and travel particularly for the affluent customer who continues to favor experiences and our portfolio is built around that customer. And while we have a strong holiday calendar this year, it's pretty much just as favorable in 2027. And even though the industry benefited meaningfully in June and early July from World Cup and to a lesser extent American 250, We expect overall demand to materially outpace supply next year, which will drive occupancies higher, creating more compression and greater pricing power throughout 2027, which should more than offset the loss of this year's event-related benefits. And I want to emphasize this point about favorable pricing, because I don't think investors and prognosticators focus on it and they certainly haven't been very good at forecasting it. Behavior and operating performance in prior cycles with growing demand and limited new supply demonstrate how pricing can accelerate through the favorable part of the industry cycle. We started to see it in Q2 and it has continued in Q3. As an historical example of a period with consistent demand growth and limited supply growth, If we look at 2010 to 2016, ADR increased by a compounded annual growth rate of 4%, much faster than the CPI's compounded growth rate of just 1.6% over those same years. That was a 240 basis point average annual premium. We believe we're just at the very beginning of a similar multi-year period of rates growing faster than inflation. And here's why. When occupancies rise, you get more sold out or high occupancy nights, which leads to higher average prices. Just as important, sustained occupancy growth gives operators and revenue managers the confidence to raise posted rates shift business away from lower price channels, reduce discounting, and run fewer, less aggressive promotions. Moreover, our industry has historically averaged a long-term compounded annual growth rate in prices higher than inflation. But due to the high inflation during the pandemic, average prices have fallen far behind the long-term trend line, and we believe the next few years offer the industry an opportunity to catch up through more rapid and significant price growth. We've started to see this price growth accelerate as this year has progressed, and we expect it to continue next year and over the next few years, barring a negative event that substantially impacts the economy and travel. For Pebble Brook in 2027, there's more drivers of upside. We expect our urban market recovery, led by San Francisco and Los Angeles, to keep rolling. This is coupled with more favorable convention calendars in San Diego, Boston, and Washington DC, which are expected to significantly improve the performance of those markets next year. And importantly, the World Cup only provided a modest benefit to our revenue and EBITDA growth. so we won't face the same event-related headwinds as the industry. But we also have quite a number of significant events next year, including the Super Bowl moving from San Francisco to Los Angeles, NCAA men's basketball regional finals in LA, the NFL draft in Washington, DC, the Star Wars 50th anniversary celebration in LA, the Major League Baseball All-Star Game in Chicago, the WNBA All-Star Game in San Francisco, and a significant amount of pre-Olympic travel into LA. We should also see further upside from our redeveloped properties, including La Playa and Naples, as they ramp further and gain additional share. And finally, our resort should continue to benefit from a strong economy and growing wealth of the higher-end consumer. While the Super Bowl won't be in San Francisco next year, we still expect strong Red Park growth in the city as conventions continue to return and corporate transient travel continues to increase significantly and does so at higher rates as corporate growth in San Francisco continues to boom. We also expect leisure travel to see further increases as the general impression of San Francisco's environment has turned positive over the last year. Our broader indicators for next year are also looking favorable. Our portfolio-wide total group and transient revenue pace is currently ahead by almost 5% versus this year. Q1 will be our most challenging quarter with soft convention calendars in San Diego and Washington, D.C., the Super Bowl in L.A. versus San Francisco, and a big citywide in San Francisco shifting back from Q1 into Q2 next year. Our Q1 revenue pace is currently negative, but it's up 8% or more in each of quarters two, three, and four. But turning back to 2026, Q4 is off to a great start, with October proving to be stronger than we expected. October REMPAR growth is tracking towards 6% or more driven by occupancy increases and healthy ADR improvement. Corporate travel is also very strong and has surprised to the upside, as it did in Q3, and we think this indicates that businesses remain confident in their near-term prospects. Total group and transit revenue pays for the fourth quarter is also favorable and is ahead of last year by $7.3 million, or 6%. Year-over-year revenue growth continues to be led by transient and overall ADR improvement represents more than half of our revenue pace increase over last year. For Q4, our outlook assumes same property rent part growth of 4% to 6%, same property hotel EBITDA of $73 to $77 million, adjusted EBITDA of $66 to $70 million, and adjusted FFO per share of 26 to 30 cents. We're also raising our full year outlook by more than the amount of our Q3 beat. At the midpoint, adjusted EBITDA is moving up $16.3 million. $13.4 million of that increase reflects Q3's outperformance versus our prior midpoint, while the remaining $2.9 million from our higher expectations for Q4. We're clearly signaling that the positive trends are more than a feeling and they've continued beyond September. For the full year, we're now forecasting same property rev par growth of 7.6% to 8%. Who would have thunk it? With the midpoint increasing a strong 280 basis points from our last outlook. We're also forecasting same property hotel EBITDA growth for the year of 12.9% to 14.1% with the midpoint at 13.5%. That's up 420 basis points from last quarter's outlook. These increases translate into an adjusted FFO outlook of $1.88 to $1.92 per share, an increase of 17 cents at the midpoint. and this year's $1.90 mint point represents more than a 20% increase over last year's $1.58. These numbers clearly demonstrate the positive benefits of the operating and financial leverage in our business today. That per share growth is particularly meaningful considering we owned more properties last year and also received $12.7 million of business interruption insurance proceeds that are not recurring. As I indicated earlier, but worth repeating since it's been a long time since we could say this, current trends remain very favorable, which gives us increased confidence heading into Q4. As we stated last quarter and at the beginning of this year, if geopolitical events, macroeconomic risks, and policy don't get in the way, the very positive fundamental setup for industry and business should generate attractive results. And that's exactly what's happened so far this year. Our entire team at Pebble Brook is proud of our performance so far this year, and we remain intensely focused on delivering strong results in Q4, 2027, and the years ahead. With that, we now be happy to take your questions. So Donna, please proceed with the Q&A.